TM/GL/ROIPP/V10

Return on Investment (ROI) / Payback Period (PP) Calculation Methodology

Return on Investment (ROI) is a popular method of measuring the success of process improvements and IT investments. It is a measure of the amount returned on amount invested. ROI is an effective approach for arguing the need for, or demonstrating the success of tools. An ROI assessment should be done for a fixed period of time; both the cost and the benefits should be calculated for the same fixed period. Cost includes one-time expenses such as initial software purchase, and initial on-site consulting and training. The ratio should get better once these onetime expenses are out of the way. o Sources of cost include: IT investments, including ongoing maintenance Training staff in new processes and IT tools Consulting needed to assist process change and IT installation Recurring cost associated with new process and IT Sources of Benefits include: Increased Productivity, Better Quality and Risk Reduction Increased Revenue, Increased Margins Reduction in operating expense, e.g. daily time savings, eliminated rework Reduced Time to Market Improved business processes Improved decision making, due to better availability of information Increased staff morale, due to using these modern tools to support the business Better Customer Satisfaction o Better Retention o Better Repeat Orders o Better Reference For a typical Project, Costs and Benefits should be calculated as below Cost should be calculated as follows Software Cost o Server and client licenses + maintenance to date Training Cost o Number of training classes (A) o Cost per class including instructor, hotel, meals, transportation (B) o # students in the class (C) o Duration of Class in days (D) o Cost per day per employee (E) o Total per Class (F = B+(C*D*E)) o Total for all Classes (F * A) Consulting / On Site Support Cost Rollout Cost o Approximate staff days of effort on the rollout (G) o Total Cost of Rollout team (G * E) Tool Use Overhead o Overhead (Staff time) to enter the data in the tool beyond what it would have taken using Microsoft Excel / Microsoft Word (X minutes per entry) o No. of entries done in the tool within the specific period (Y entries)

o o

Internal

Polaris Software lab Ltd

TO-GL-004

Page 1 of 2

TM/GL/ROIPP/V10

o Total Staff Time (Z = (X*Y)/(60*8) days) o Total Use Overhead Cost (Z * E) Added Review o Increase in easy-to-access information because of the tool which will now be accessed easily by many users, leads to additional review, discussion, test planning, and change control. The cost of doing the job right is, nevertheless, a cost, and is captured in the ROI model. o Total Staff days spent on Review (H days) o Cost (H * E)

Benefits should be calculated as follows Cost Savings from Staff Working More Efficiently o By calculating the savings realized from staff on projects having a readily available, always-up-to-date, common source of information upon which they can base their work. It is a cost reduction from staff working more efficiently o Number of person that use information for direction in their work o Time Save per person, per information, because they have readily available information in repository upon which they can base their work. Avoiding the Cost of Unnecessary development o On Projects employees are able to see what each other is doing; redundancy is spotted; priorities are better managed. This leads to cost savings in avoiding unnecessary work. o When information are not recorded and managed in a company wide system, they are subject to loss due to staff churn. The loss means that it must be "rediscovered" and re-engineered again and again. Reducing the cost of defects / rework o Building a baseline model of what we believe was the cost of defect detection and removal before we added the new process and tool Total number of defects Defect removal effectiveness in each phase Cost of Quality of finding and fixing a defect in each phase o Recalibrate the baseline model with improved defect detection and removal, the cost of which we paid for as Added Review above. Total number of defects Improved defect removal effectiveness in each phase Cost of Quality of finding and fixing a defect in each phase Our cost saving is cost of baseline-1 subtract cost of baseline-2,

BCR (Benefit Cost Ratio), Tally the Benefit to Cost Ratio, Benefit to Cost Ratio: Estimated Benefits / Estimated Costs BCR should be at least equal to (1 + interest rate) ^ Years for a positive investment decision. Years are the period for which BCR ratio is being projected / calculated In case all benefits are not quantifiable, the investment decision will not depend on BCR. There is always risk involved of the projected BCR being materialized to actual. Payback Period is the number of years required to achieve the BCR of 1

Internal

Polaris Software lab Ltd

TO-GL-004

Page 2 of 2